How to Assess Existing and New Hotel Supply

Hotel markets are dynamic because guest expectations are always evolving. The inventory of existing hotels is an artifact of historical guest preferences, while the new hotel supply pipeline indicates current and future desires. A market reaches equilibrium when supply meets demand, but this can be elusive, especially during and economic expansion. Therefore, it is important to start with a firm understanding of hotel supply before committing to an investment.

Market Survey

The first step in analyzing a market is to understand what exists. At its most basic level, a market survey should consider all hotels along the chain scale. Depending on your investment strategy, you may be able to limit the survey to properties with more than 50 rooms and less than 500 rooms. This is where most brands play. However, you should include smaller or bigger hotels if they are competitive within your strategy.

Your survey should include the finer details of each hotel, including:

Number of Rooms

Function Space Sq. Ft.

Year Built

Year Last Renovated

Asset Quality

Brand

Management Company

Owner / Major Partners

Last Sale Date and Price

Financing Information – Lender, Loan Amount, and Maturity Date

A comprehensive survey allows you to apply some analytical techniques that define the market. For example, you could categorize many of these factors into three or more broad buckets. Count the number of rooms or properties that fit into each category to draw conclusions about over or underrepresented product.

An analytical approach allows you to quickly filter hotels in a market by investment or operating characteristics that will fall within your investment criteria. When you pair this data with what you know about demand coming to the market, you’ll be able to assess where there are glaring holes.

Consider Local Retail

Restaurants and retail are other dimensions of the market is to consider. Expect these to be competitive if you’re interested in full service hotels or select service with F&B options, like Courtyard or Hilton Garden Inn. Anything that takes the guest out of your hotel will be a major influence in their perception of your hotel.

National retailers spend tremendous resources to analyze a market. While their research targets the demand side of the equation, your market survey will point to additional opportunities that may exist for new hotel supply.

Quality and Brands

Get on the ground and walk the major competitive hotels. TripAdvisor can give you a sense of asset quality, but those reviews are subjective. They only represent a fraction of guests. The 95% of guests that don’t use TripAdvisor or leave reviews on OTAs may have a completely different opinion. You can only get that from visiting the hotels yourself.

Construction and renovation years have a big impact on competitive positioning. Guest preferences change, and older properties struggle to maintain modern standards. This can be as simple as a different lobby or room layout. A hotel built in 1995 provides a very different experience than one build in 2015 even though it may have similar finishes.

Remember, quality of the structure and interiors is important, but property culture can overwhelm much of this. A beautiful, new hotel with a bad culture will underperform a shabby hotel that puts its guests on a pedestal every day of the week.

Guest profiles are the primary influence in designing a hotel brand. Therefore, a brand of a different concept within the same brand family will appeal to a different guest. However, competing brands, like Hampton Inn and Fairfield Inn, appeal to almost the exact same guest demographic and psychographic profile. A guest’s decision comes down to loyalty and quality in this case.

Get to know the offerings of each brand in your investment strategy. This knowledge comes from experience and exposure. The more hotels you see the better.

Hotel brands are in the franchising business. Their primary concern is consistently accumulating a larger share of the total revenue in a market. Therefore, they do better with the more brands they can fit into an area. Guest experience and increasing revenue are important complementary objectives, but brand presence is a real consideration.

Development Stages

New hotel supply can be difficult to gauge. The announcement of a new development does not ensure delivery. There are many steps between buying the land and opening the door. Further, the abilities and track record of the developer behind the project have a huge impact on the likelihood of completion.

A variety of factors influence the success of a new development, including sponsor, government, and market timing. Other factors, beyond these three, combine to make it a challenging undertaking. Each of these factors are at play in progressing through the following development stages:

Early Plan – feasibility and announcement

Planning – preparation of materials for government approval submission

Final Planning – government approvals received and preparing construction documents

Construction – active building and pre-opening activities

Opening – product launch and ramping up operations

Your market survey should uncover where each proposed new hotel is in this process and how long they’ve been sitting at that stage. A new hotel development takes 2-3 years to open from the initial announcement. Government approvals can hold up a process, but once the developer breaks ground, you can expect to have a competitor open its doors within 16-22 months.

New hotels are not directly competitive from day one, but they quickly become a threat after working out the operational kinks. Existing hotels must examine how their property quality and operations hold up against the new entrant. For example, an existing property may require some renovations just to maintain a defensive position.

Investment Trends

Investment trends ebb and flow along two major currents – cyclical and secular.

All investors are very aware of the business cycle. Business and consumer sentiment, money supply, and other factors influence business and consumer spending. Favorable macroeconomic conditions usually result in good times, while low sentiment and tight monetary supply end up in slower growth.

Most investors and commentators try to prognosticate about the status of “the cycle” to time a good entry and exit point. However, nobody has ever been 100% correct on this, and they miss great opportunities by getting out too early.

Secular trends are based on social, technological, governmental, and other factors that influence how businesses and consumers behave. This is the undercurrent that dictates the popularity of a location or product type.

Think of a secular trend as the line between two points on a map – as the crow flies. If you could go from point A to B without taking surface roads, the journey would be a breeze. Gravity and the natural and built environment limit our ability to do that. Therefore, we must contend with the inefficient surface streets – market cycles – to get from here to there.

All the greatest investors are more focused on the secular trends than business cycles.

Market Example – Miami

New hotel supply enters and existing supply upgrades in markets where demand is growing. There are very few reasons to spend money in a place with no clear path to economic growth.

Miami emerged from the 2008 financial crisis as a dominant, international gateway market. The business cycle created voracious global demand for high-quality properties located in the United States. That foreign capital found its way into the existing majors, like New York, San Francisco, and Washington, DC. Still, Miami offered something that the other high secondary markets couldn’t – a cultural connection to Latin America.

The growth of the Latino population in the United States will handily exceed that of any other demographic in the coming decades. Miami positioned itself to take advantage of that growth as the financial and cultural capital of Latin America in the United States. It courted major corporations to establish their LATAM divisions in the city and worked with the state to keep a favorable business climate.

There’s no question that Miami and its neighboring cities have tremendous challenges ahead, but the secular trend is positive.

Development Examples

Extended stay brands are experiencing tremendous growth in new construction. The contract economy continues to displace a traditional, full-time, location-based workforce. Further, leisure guests appreciate the additional amenities these properties offer. Finally, this offering is relatively new to the scene with very few offerings in many markets. These aspects, among others, make extended stay one of the most attractive hotel investments for the foreseeable future.

Full service hotels, on the other hand, are losing popularity among developers. They are expensive to build, operate, and maintain. Aside from dramatically underserved markets, full service hotel development is next to non-existent. The properties that exist are enough to meet the needs of most demand, and beyond that, it’s more efficient to develop a select service or extended stay property.

Demand drives most investment trends. However, supply is the direct reflection of this demand. Seek to understand what segment of demand each property is serving. This will help you find demand holes or offerings that are overrepresented in the market.

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